Jan

13

Contrarian investing is sometimes seen as “picking the losers.” As Kim puts it, don't pick what the consensus thinks is beauty because that's priced in. But it’s not really, it’s about seeing what others do not, or not seeing what others do.

When I was younger I went to the horse races often, and found it especially important to be a contrarian when placing bets on horses. Since the stock market is the biggest pari-mutuel pool in the world, there is a parallel. All the money gets tossed into one big pot, then after the track takes their cut (commissions, spread, vig) the rest is divided among the winners. The amount that’s divided depends on what is bet for or against the winners; the more or less bet, the lower or higher the payoff. That’s easy enough.

At the track, as in the market, the key is to spot pricing anomalies where the true odds are different from the odds on the tote board. The racing junkies were scouring the daily racing form to find the winner as if all those stats could mathematically estimate the behavior of an animal on any given day-the quant’s would go crazy at the track. But I used the form to estimate the 3 or 4 horses most likely to win, and then just followed the tote board calculating payoffs for various combinations. The key is finding that 3 to 1 horse going off at 7 to 1.

Some fun rules I learned from my old friend Greg at Canterbury Downs:

1. Never bet on a white horse. It may be a great horse on paper, but all the little old ladies bet on the white horses because they like to watch them run, and it’s the only one they can see. It destroys the true odds.

2. Never bet on a horse with a stupid name. Lot of people don’t read the form, or look at the tote board, they just throw their money on a whim as silly as the name. It destroys the true odds.

3. Never bet on the favorite, the favorite wins less than half the time. Lots of people like to just bet the favorite to proudly proclaim they are the winner, and it’s true the favorite wins more often than any of the rest of the field. But the true odds are skewed by those who bet simply because it’s the favorite and in reality over the long run you will have a greater payoff betting identical amounts on the second favorite.

4. Never do an exacta box with the favorite on top, wheel the field over the favorite since the favorite is just as likely to come in second as first, but the payoffs are larger. This worked for me once at Aksarben-a complete stranger I struck up a conversation with was doing an exact box on the top 3. I told him for the same price he could wheel the field over the favorite for a better payoff and sure enough on that race the favorite came in second to a long shot and he won hundreds where he would have had zero.

5. Never bet less than 2 to 1, in addition to the house edge, the breakage is an obscene level of vig (breakage is rounding DOWN the odds to the nearest tenth of a % doubled because it’s a $2 bet). That is, commissions and spread are proportionately larger on low value trades.

6. Never bet on a horse with a skinny jockey. Do you really think an extra 4 pounds on a 1,200 pound animal makes a big difference? Many at the track do, and skew the true odds from the heavier jockey’s, who, because they are heavier really have to know how to win.

7. Never bet on a horse with “new” blinkers or a “new” jockey. If the horse was a pig before, it’s still a pig just with a new rider and clothes.

8. Never bet just to bet. If you don’t see the favorable combination, there is always tomorrow. The tendency to not want to go home a loser at the end of the day is big leading to good money flowing to bad.

9. Never bet on a horse that takes a dump before the race. This really had no logic; we just thought it was really funny.